This special issue of the Quarterly Report on the Euro Area provides a comprehensive assessment of the impact of the crisis on external divergences in the euro area. After a decade of steady divergence, the global economic crisis has triggered a partial rebalancing of current accounts in the euro area. The narrowing of current account differences between Member States has both structural and cyclical causes and could be partially reversed with the recovery. It has so far been associated with only modest correction of past divergence in price competitiveness. As a result, significant adjustment needs continue to exist and call for a comprehensive policy response tailored to the specific needs of each Member State. The crisis has underscored the need for reforms in the euro area and for co-ordination across Member States. A coordinated and ambitious policy response would ease the necessary adjustment processes but would also boost the euro-area's long-term growth prospects. Tackling these challenges is a central plank of the new Europe 2020 strategy for smart, sustainable and inclusive growth.

After a decade of divergence of external positions and competitiveness within the euro area, the global financial crisis has triggered a partial and partly temporary reduction of Member States' current account deficits and surpluses. Member States which entered the recession with large current account deficits have experienced a combination of a sharper drop in private-sector demand and a less dramatic fall in exports than the rest of the euro area. These forces have tended to curb their current-account deficits. Conversely, Member States which entered the recession with large current account surpluses have experienced more resilient private-sector demand and a bigger exposure to the slump in world trade due to their export specialisation and greater trade openness. The resulting current-account rebalancing has, however, not been accompanied by a significant rebalancing of cost and price differences and, as a result, is likely to prove at least partly temporary.

As already highlighted in the Commission's EMU@10 report in 2008, domestic macroeconomic imbalances such as housing and credit bubbles, contributed to fuel the large current account deficits in some Member States in the years preceding the crisis. The crisis has corrected a number of these imbalances, including a progressive cooling-off of housing and credit markets. But significant imbalances remain and some new imbalances have emerged in the form of surging unemployment. The crisis has therefore not reduced the need for adjustment. In particular, a correction of past competitiveness losses and a reallocation of supply to the export sector remain warranted. The crisis might render the adjustment more challenging because the combination of low inflation and nominal rigidities as well as lower growth potential can make necessary wage and price adjustments more difficult. Impaired financial intermediation may further hamper the necessary adjustment processes. To tackle these challenges, a comprehensive and coordinated policy response is being put in place which covers measures in a range of areas: macroeconomic policies, labour markets, product and service markets and the financial sector. It aims at facilitating the necessary competitiveness adjustment and reallocation of resources, at boosting potential growth and at restoring the full functioning of financial markets.

In most euro-area Member States showing large current account surpluses, the steady accumulation of surpluses in the pre-crisis years can be mainly ascribed to persistent weakness in domestic demand. In addition, due to their strong competitive positions, these countries were well-positioned to take advantage of the boom in world trade in the few years preceding the crisis. It allowed them to benefit from faster growth in exports than the rest of the euro area. Since the onset of the crisis, surpluses have contracted substantially on the back of lower exports, significant fiscal expansions and comparatively resilient domestic private-sector demand. However, looking forward, signs of structural strengthening of private-sector demand remain elusive and surpluses could widen again as the recovery takes hold.

Since the introduction of the euro, euro-area Member States have recorded diverging developments in their export performance, mostly due to diverging developments in price and cost competitiveness. In addition, non-price competitiveness factors (such as product quality or technological content, industrial specialisation, etc) have also contributed to divergence in external performance. This was especially visible during the recent crisis, when the product structure of exports explained much of the differences in export developments across Member States.

Financial globalisation has led to a sharp increase in gross cross-border holdings of foreign assets and liabilities. As asset and liability prices fluctuate, the value of the net foreign asset position (i.e. the net asset or liability position of a country relative to the rest of the world) changes. Such valuation effects can play an important role as they affect the level of the trade balance needed to keep the net foreign asset position stable. Since the launch of the euro, the external assets and liabilities positions of some euro-area Member States have been subject to significant valuation effects. In particular, current account deficit countries have experienced persistent negative valuation effects which have aggravated their external indebtedness. The crisis has entailed negative valuation effects in the surplus countries, which can in part be related to changes in risk premiums on bonds and sub-prime losses.